Challenges Facing Wineries and Wholesalers

FILED SEPTEMBER 1, 2009

Dear Client:

The tenuous relationship between wineries (particularly small and medium wineries) and wholesalers is nothing new. Wineries commonly complain of having a tough time gaining distribution, and then not receiving the attention they feel they deserve once they sign with a wholesaler. Wholesalers, meanwhile, point out they can’t represent everyone and struggle to meet demands both from their large suppliers (Diageo, Constellation, etc) along with the rest of their portfolio. Most wine and spirits wholesalers aren’t protected under franchise laws so they face the threat of brands being snatched away without much of a warning, which perhaps understandably keeps them focused on high revenue generating suppliers. Consolidation has made many of those scenarios even more of a reality. And lately, several of the larger wine and spirits companies have consolidated or are in the process of consolidating their brands among wholesalers, which has caused industry-wide movement and relocation. Unfortunately, one of the biggest pitfalls of consolidation is that smaller brands are often pushed out.

Consultant Bruce Herman (former svp, sales and marketing, North America at Foster’s Wine Estates) explored this issue in his panel at the Wine Industry Financial Symposium in Napa this week. On the roster was Bill Cascio, vp director of winery relations at Glazer’s; Ted Jansen, president of Inertia Beverage Group; Dan Leese, president of 585 Wine Partners; and Chris Underwood, coo at Young’s Market Co. It may seem like a perfect storm but all the panelists did a great job promoting their agenda while remaining as unbiased as possible.

THE WINERY’S PERSPECTIVE. As one of the first panelists to speak, Dan Leese brought an interesting perspective after formerly working at Brown-Forman and Foster’s. Now Dan and his business partner Doug Walker head their own wine company best known for its Red Truck Wine brand. When asked to compare and contrast his past experience with distributors to his current situation, Dan noted it’s a financial relationship that large suppliers are more likely to win due to their size. Large suppliers “bring a lot of cases and revenue” along with “coverage and market share.” They’re much more of a sure thing, while distributors have to “make a bet on the small suppliers.” As a result, “our responsibility is to make ourselves relevant.”

Of course all suppliers want more time and attention from their wholesalers but it’s not always realistic. As a former svp at Foster’s Americas, Bruce agreed that suppliers are “never happy with the time and attention” they get from wholesalers no matter what their size.

Dan said “you’ve got to stop complaining about access to distributors and access to market...you own the number in Texas, not Glazer’s.” His company realized that some of the best ways for them to manage their business is through their sales people working closely with distributors and visiting accounts face to face.

DISTRIBUTOR PERSPECTIVE. Chris Underwood, meanwhile, said that consolidation among wholesalers is often a response to consolidation among suppliers and retailers. His company’s west coast strategy was “mainly driven by our customers because we’ve seen a lot of consolidation...also supplier level consolidation...and we’ve seen a lot of synergies across states.”

When asked about some of their biggest challenges, Chris jokingly replied: “Our biggest challenge is dealing with suppliers and the biggest challenge for suppliers is dealing with distributors.”

“Consolidation among suppliers has driven distributor to react...they’re trying to protect themselves...it’s important to understand that as the suppliers consolidated it put an enormous among of pressure on distributors.” Now, distributors are left to “sift our way through difficult decisions” that affect all their brands. Large suppliers often make “enormous demands...that does take time and attention away from other suppliers as much as we try to pretend it doesn’t happen but it does.”

He notes that “a lot of our revenue comes from smaller suppliers,” along with innovation and other “exciting things.” Smaller companies are “critical for the future success of this industry...we understand that, all distributors understand that, but it’s difficult for distributors navigating through these large suppliers.”

OFFERING A DIFFERENT ROUTE TO MARKET. Ted Jansen of IBG admitted that consolidation and the recession has helped his business grow. When things were going great a few years ago, people were satisfied with their current route to market. However, that’s changed quite a lot in the past year or so.

“Distributors are smart business people because they’re representing brands that fit in their model... there are thousands of wine brands that get lost in the middle and that’s where we’re looking to play,” said Ted. Their goal is to “bring internet technology to this industry.”

With regards to direct-to-consumer sales, Bill Cascio of Glazer’s noted, “Not only is my competition Youngs and RNDC but now Fed Ex and UPS,” which met with laughs in the room. His unique role at Glazer’s is to build relationships in California since the company doesn’t actually distribute in that state.

WILL LUXURY WINES MAKE A COMEBACK? “You have to believe it will or we should all go home...first the restaurant business has to come back,” said Dan.

Bill reiterated what we heard a lot of other people say at the symposium: “We deal with this in 2001...this is probably longer and deeper but people love luxury in the US.” He noted that there will always be badge drinkers and luxury occasions.”

Ted said he believes this is all cyclical. He predicted that things will be good in about 3 years and great in 7 years. In about 10 years, though, we’ll be back in the same spot. To help deal with these trends, Ted encourages wineries to “spend marketing dollars to make sure consumers are still drinking wine.”

HOWEVER, EXPECT FURTHER REDUCTION IN LUXURY INVENTORIES. Both Chris and Bill said they’d like to cut back on inventories further for wines priced above $20 mainly because they’re not selling. “We want to work with suppliers to make sure there’s not too much of a hiccup but, yeah, sales are off in high-end wines and we have to manage our inventory...we’re fast pennies and we can’t afford to have excessive inventory in the high-end,” said Chris.

“Yeah, the same,” said Bill. “Especially off-premise, those inventories are pretty balanced...our inventories are probably still a little high and we’re trying to whittle that down...the most impact of inventory concerns are higher end wines” in the $20-$40 range. The both agreed that about 30 days of inventory is good, roughly speaking.

FORTUNE ON TRACK IN FISCAL ’09, GAINING SHARE IN KEY CATEGORIES

Yesterday Fortune Brands chief Bruce Carbonari reaffirmed the company’s full-year 2009 targets when speaking at the JP Morgan Diversified Industries Conference. In his prepared remarks Bruce stated that “while consumers remain very cautious and the U.S. housing market remains challenged, we're encouraged by improvements in key economic measures, including consumer confidence and sales of new and existing homes. Additionally, our third quarter order patterns are tracking to our expectations and we're continuing to gain share in key product categories.” They expect to hit their target for diluted EPS before charges/gains to be in the range of $2.00 to $2.30, and to generate free cash flow in the range of $400 million after dividends and net capital expenditures. Fortune’s Q3 results will be announced October 23.

WSD BRIEFS:

CA “CHECKOUT BILL” POSTPONED. A CA bill (AB 1060) that would force all alcohol purchases at grocery stores to take place at a “live” cash register versus a self-checkout line was delayed until the next legislative session in January. Supporters believe the delay will give them more time to lobby for Gov. Arnold Schwarzenegger's support. Fresh & Easy is against the proposed bill since it uses self-service checkouts exclusively.

PERNOD RICARD’S TROUBLED KAHLUA LIQUEUR is launching a new extension in hopes of improving sales. Kahlua Coffee Cream is a limited edition offering that combines Kahlua and cream as a “little indulgence” to your coffee. It will be available nationwide October through December for a suggested retail price of $17.99.

1800 TEQUILA TARGETS PATRON IN NEW AD CAMPAIGN. Proximo Spirits’ 1800 Silver Tequila is launching its first ever television ad campaign that features Sopranos star Michael Imperioli. The spot pokes fun at Patron and claims tequila “has lost its way, becoming an overpriced and pretentious spirit.” You can see some of the spots on its website: www.1800tequila.com.

ARGENTINEAN WINE “FALLING STAR” is entering the 3L boxed wine category with a Malbec, Cabernet Sauvignon and Chardonnay. Falling Star is imported by Frederick Wildman and Sons. The suggested retail price is $19.99 for a 3L box.

PREISS IMPORTS struck an agreement to import GlenDronach back to the US in the fall of 2009. You may recall that the GlenDronach Distillery was acquired by BenRiach Distillery Company from Pernod Ricard in August 2008. Preiss has an existing distribution agreement with BenRiach.

NEW ZEALAND has reached the $1 billion mark for wine exports, according to trade group New Zealand Winegrowers. The group originally expected to reach its goal next year in 2010.

INERTIA BEVERAGE GROUP has launched CollectiveVine.com. To read our past coverage, click here.


Until tomorrow, Megan

“I want freedom for the full expression of my personality.”
Mahatma Gandhi

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